With just about one hour until the FOMC statement, and the market in a general state of panicked, if bullish, disarray which had seen a material selloff in the Treasury complex, nobody was expecting a strong sale of $35 billion in 5-Year paper which just concluded moments ago. However, nobody expected it to fare this poorly either.
With the When Issued trading at 1.40% moments before the announcement, traders were left almost speechless when the 5Y priced at 1.415%, tailing by a whopping 1.5 bps, which may be the worst tail for this maturity bucket in years.
The internal were just as ugly: with the Bid to Cover sliding from last month's 2.57 to a weak 2.43, it was the plunge in Direct orders, which took down just 3.8% of the final auction, the lowest since June 2013, coupled with the drop in Indirects left holding 58.9% of the auction, the forced Dealers to end up with 37.2% of the auction, a 4.44x hit rate after tendering $57.8 billion in bids.
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Confirming the ugly auction was the reverberation across the bond market which showed a substantial jump in yields not only at the 5Y mark, but across the entire curve.
And now all eyes on Yellen because if the Fed Chairwoman is even a fraction hawkish (which would be far more than most expect), all losses will be promptly made up following the selloff in equities should December still remain in play.
